Read the following news published on September 26, 2022 : "The central bank has increased the benchmark lending rate by 140 basis points." Identify the likely cause and consequences behind this action taken by the Reserve Bank of India.

Question

Accepted Answer

Analysis of central bank increasing benchmark lending rate by 140 basis points:

Likely Cause:
1. High inflation in the economy
2. Excess liquidity in the banking system
3. Rising consumer prices
4. Need to control money supply

Consequences:
1. Cost of borrowing increases for commercial banks
2. Banks raise their lending rates
3. Borrowing becomes expensive for consumers and businesses
4. Consumption and investment decrease
5. Aggregate demand falls
6. Money supply decreases
7. Inflationary pressure is controlled
8. Economic growth may slow down temporarily

This is a contractionary monetary policy measure to control inflation.